Mexico: Annual Review – Global Tax 2016

Q COULD YOU OUTLINE SOME OF THE KEY DEVELOPMENTS AND
CHANGES RELATING TO TAX LAWS THAT YOU HAVE SEEN IN MEXICO OVER THE
LAST 12-18 MONTHS?

BARRERA: For the last four years, the Mexican
government has passed a number of strategic reforms designed to
make the economic environment in Mexico more appealing and
competitive for foreign and domestic investors. An increase in
investments would naturally result in higher tax revenues. However,
these reforms have not brought the expected results. The pace of
economic growth is slower than the government had expected.
Therefore, the government was compelled to backpedal on some of the
previous reforms. They amended the Income Tax Law to include some
tax incentives, particularly for energy and infrastructure
investments, such as accelerated depreciation, release of thin
capitalisation rules and granting a tax credit on reinvestment of
dividends as well as a repatriation capital plan for Mexicans
holding investments abroad. The government also created
'special economic federal zones' to grant tax, customs and
financial benefits to investments in these special zones.

Q TO WHAT EXTENT HAVE RECENT TAX REFORMS BEEN DRIVEN BY
THE POLITICAL AGENDA OR A PERCEIVED NEED TO COUNTER TOUGH FINANCIAL
CONDITIONS?

BARRERA: The so-called 'structural
reforms', including tax reforms, as well as recent tax
amendments which reverted some of the original aspects of the tax
reform, have been driven by the global economic changes. The
government's expectation was that structural reforms would
result in such a massive boost to the Mexican economy that
investors would not mind paying higher taxes. In other words,
investors would be doing so well that the tax cost would be almost
irrelevant. As it turned out, the current economic reality is quite
different and the newly enacted reforms intend to shyly revert some
of the structural tax reforms as those had clearly reduced the
attractiveness of investing in Mexico.

Q TO WHAT EXTENT IS TRANSFER PRICING A KEY CHALLENGE FOR
MULTINATIONAL ENTERPRISES? ARE TOO MANY COMPANIES UNDERESTIMATING
THE IMPORTANCE OF COMPLIANCE AND RISK MANAGEMENT IN THIS
AREA?

BARRERA: Transfer pricing has become the most
relevant collection tool for tax authorities and, by the same
token, also one of the most important specific items to consider,
at least for multinational companies. Tax authority statistics show
that in recent years, transfer pricing audits have increased more
than tenfold, probably because they have proven to be more
effective in terms of collection than traditional audits. For many
years, transfer pricing obligations were perceived by taxpayers as
mere statutory obligations with almost no consequence at all. This
situation gave taxpayers the false perspective of protection as
long as filings have been made. Years later it turns out that tax
authorities are looking at the transfer pricing reports and they
have in-depth questions and observations, which are resulting in
headaches for taxpayers.

Q HOW WOULD YOU DESCRIBE THE TAX LAWS IN MEXICO AS THEY
RELATE TO FOREIGN ENTITIES? ARE YOU SEEING MORE INCENTIVES DESIGNED
TO ENTICE SUCH ENTITIES, OR HAS THERE BEEN AN EFFORT TO TIGHTEN
LAWS AND CRACK DOWN ON ISSUES SUCH AS OFFSHORE TAX
JURISDICTIONS?

BARRERA: Mexico is looking to attract foreign
investment just like any other country but at the same time has
clearly made a stand against the use of offshore tax jurisdictions.
Mexico has executed a vast net of international tax treaties,
including tax treaties to prevent double taxation, as well as other
treaties to help tax collections such as treaties for the exchange
of tax information, the Convention on Mutual Administrative
Assistance in Tax Matters and even FATCA. So it is clear that
Mexico intends to attract foreign investment by mainly inviting
clean money.

Q HAVE YOU SEEN AN INCREASE IN TAX DISPUTES AND
LITIGATION IN MEXICO? WHAT LESSONS CAN COMPANIES LEARN FROM RECENT
PROSECUTIONS, PENALTIES AND COURT RULINGS?

BARRERA: When it comes to tax there are two
types of litigation cases: litigation vs. assessment cases and
constitutional proceeding cases (known as Amparos) against
laws which are not aligned with constitutional principles. The
number of litigation vs. assessment cases has been fairly stable,
while Amparos have decreased dramatically. Unfortunately,
the reason for the decrease in Amparo litigation cases is
not that laws have become more reasonable or consistent with the
constitution, but rather that taxpayers have lost their confidence
in the judiciary. This is particularly the case with the Supreme
Court, where some justices are clearly biased in favour of the
government. The lesson to learn for taxpayers is that it is worth a
enlisting a good tax lawyer, as lawyers who are not tax specialists
will pretend to defend a tax case but only complicate the legal
situation for the taxpayer.

Q IF A COMPANY DOES FIND ITSELF THE SUBJECT OF A
TAX-RELATED AUDIT, INVESTIGATION OR ENQUIRY, WHAT STEPS SHOULD IT
TAKE TO MANAGE ITS RELATIONSHIP WITH TAX AUTHORITIES?

BARRERA: Just as with any other specialisation
area, prevention is the first issue to keep in mind, so seeking
proper advice is indispensable. This fact becomes even more
demanding when an audit or investigation process starts. Then, the
taxpayer should not attempt to attend to the process on its own,
but rather seek a professional adviser who can manage the case and
follow his or her recommendations. Frequently, taxpayers neglect to
properly attend the first stages of an audit or an investigation
process, lest they make their situation worse. It is therefore
better to get professional help as soon as a tax process begins,
even if it seems straightforward.

Q WHAT GENERAL ADVICE WOULD YOU GIVE TO COMPANIES ON
EFFECTIVE TAX PLANNING? HOW IMPORTANT IS IT TO CREATE TAX EFFICIENT
STRUCTURES AND IMPROVE INTERNAL FUNCTIONS AND PROCESSES ACROSS THE
ORGANISATION?

BARRERA: Complete and accurate information is
crucial when it comes to taxes. There are different profiles of
taxpayers, with different aversions to tax risks. However, it is
imperative for a taxpayer to understand perfectly the facts and
expectations in each situation in order to make the best decision
according to its interests. For this purpose, it is important to
seek objective and professional tax advice. From our experience,
the best tax adviser is not the one who tells the taxpayer what he
wants to hear, but the one who is willing to tell the client the
truth. In addition, it is important to bear in mind that effective
tax planning requires maintenance, as a formula which works today
might not work in a few years given that regulations, laws and the
criterion of the courts change. So, it is of the utmost importance
to periodically revisit tax planning structures to assure that they
are in good standing or else have enough time to act early in the
case of any potential risk.

Originally published by Financier Worldwide
Limited.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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On September 14, 2016, the Federal Revenue of Brazil published Normative Instruction RFB 1,658/2016, which updates the blacklist (list of tax havens) and the graylist (list of privileged fiscal regimes).

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